Obama just slammed the door on Arctic drilling

A ringed seal pup peeks out from its protective snow cave near Kotzebue, Alaska.Reuters/HandoutThe Obama administration officially shut the door on Arctic drilling, a move that could prevent any new drilling for years to come.

The U.S. Department of Interior announced on October 16 that it would cancel two lease sales for offshore acreage, which had been scheduled to take place in 2016 and 2017. Environmental groups have been doggedly criticizing the Obama administration for allowing Royal Dutch Shell to drill in the Arctic to begin with, citing the potential catastrophe if an oil spilled occurred. They had called upon the President to deny any permits to Shell.

But it wasn't environmental protest that killed off Shell's drilling campaign. What really forced the Anglo-Dutch company to retreat was low oil prices and disappointing drilling results.

Similarly, the Obama administration is now shutting the door on future lease sales not because of concerns over the environment, but "In light of current market conditions and low industry interest," as Interior put it in a statement.

On its face, the move is a logical one. Few other companies were interested in drilling in the Chukchi or Beaufort Seas, despite several having purchased leases years ago. Statoil and ConocoPhillips, two other large oil companies interested in the Arctic, had previously put their Arctic ambitions on ice because of the difficulty and high costs associated with drilling in the region. With Shell announcing that it would suspend U.S. Arctic exploration for the "foreseeable future" there are now zero companies that are viably interested in drilling anytime soon.

Remarkably, however, the interest in new leases had dried up even before the downturn in oil prices. Interior said that it put a "Call for Information and Nominations" in September 2013, which is essentially a way for the government to solicit interest from the industry on which areas to auction off based on their interest. While it would be understandable that few companies would express interest in the current market downturn, Interior issued the Call for Information in September 2013, a time when Brent crude was trading around $110 per barrel.

Despite high oil prices, no companies submitted nominations for areas to be auctioned. As a result, Interior canceled the 2016 auction. The same was true for the 2017 auction. In the July 2014 Call - when oil prices were trading at around $105 per barrel - there was only one submission from a company interested in the Arctic. In its October 16 announcement, Interior said that it was concerned there wouldn't be sufficient competition to move forward with the lease sale. Such an outcome could mean that the government would lose more money than it took in by selling off the assets, due to the lengthy work involved in conducting regulatory scrutiny, environmental assessment, and studying and issuing permits.

U.S. President Barack Obama speaks about the FY2016 budget at the Department of Homeland Security in Washington, February 2, 2015. REUTERS/Larry Downing

Thus, the lease sales will be cancelled. As such, no new companies will acquire acreage in the Arctic for several years at least. But even if Interior hadn't cancelled the sales, it is far from clear that there would have even been a company that would be willing to risk scarce resources in bidding on risky Arctic oil.

Moreover, Interior also dismissed requests from Shell and Statoil to extend their current leases, which would have allowed them more time to return to the Arctic if they had wanted to do so at some point in the future. Their ten-year leases will expire in 2017 for the Beaufort Sea and 2020 for the Chukchi Sea. Justifying the dismissal, Interior said that the "companies did not demonstrate a reasonable schedule of work for exploration and development under the leases."

With no plans by either company to drill within that timeframe, it appears that they are heading for expiration. That leaves almost no possible pathway for an oil company to drill in the Arctic for years to come, perhaps killing off drilling for a decade or so at a minimum. Again, it was likely that there wouldn't have been new drilling in any event, given Shell's decision and current market conditions, but Interior's decision officially shuts the door on the Arctic in the medium-term.

Recognizing the significance of the move, Alaskan Senator and Arctic oil proponent, Lisa Murkowski (R), issued a blistering statement denouncing the Interior Department. "This is a stunning, short-sighted move that betrays the Interior Department's commitments to Alaska," she said.

She went on to argue for more lease sales. "Instead of seeking to shut down Alaska, Interior should remember that the North Slope was nearly abandoned after 14 dry holes were drilled. The opportunity to keep going led to not only the discovery of Prudhoe Bay, but also the production of more than 17 billion barrels of oil and a generation of opportunity for Alaska. I will certainly remember that fact as I continue to push legislation that will force Interior to hold regular lease sales in the offshore Arctic."

It is possible that under a new Republican administration in 2017, the Interior Department could relaunch the leasing process. However, that could take several years given the lengthy environmental assessments the agency needs to conduct before offering up acreage. Even then, there is a huge question mark that hangs over the process - there is very little interest on behalf of the industry, regardless of what the government may do. In this era of low prices, Arctic oil may simply be unprofitable.